Activism Grows But Also Slows

A rise in the number of companies targeted hides a drop in activity by primary focus activist funds.

Note: Activism Monthly Premium, the flagship publication from Activist Insight, has been rebranded Activist Insight Monthly as of July 1, 2016. The publication remains the only magazine dedicated to shareholder activism.

Shareholder activism continued to grow in the first six months of 2016, despite signs that a core group of activists were less busy than in prior years.

A total of 463 companies worldwide were subjected to public demands by shareholders in the period to June 30, 2016, according to data published in Activist Insight Monthly: Half-Year Review 2016, produced in association with Olshan Frome Wolosky. That compares to 405 in the same period last year, and 637 for the whole of 2015.

Most regions showed growth

Growth was notable in a number of markets, including:

Europe (inc. UK), up 44% to 56 companies,

Asia, up 78% to 32 companies,

USA, up 10% to 306 companies,

Australia, up 11% to 30 companies.

However, the number of companies declined slightly in Canada, where 30 companies were subjected to demands by shareholders in H1 2016, compared to 36 in H1 2015.

Dedicated activists less busy

Notable among the data was a slowdown in demands by funds dedicated to activist investing. Primary focus activists – which dedicate almost their entire funds to activism – subjected 75 companies worldwide to public demands in the first half of 2016, against 81 in the same period last year. That was the first decline in activity since Activist Insight’s records begin, in 2010.

Primary Focus

H1 2013

H1 2014

H1 2015

H1 2016

Growth rate

over last year

Europe (incl. UK)

17

14

11

11

0%

Asia

1

5

4

7

75%

Other

0

0

3

3

0%

US

50

53

59

47

-20%

Australia

1

2

3

4

33%

Canada

3

2

1

3

200%

Total

72

76

81

75

-7%

Proxy fights

According to Activist Insight data, 20 US proxy contests have gone to a vote this year, along with five situations where definitive proxies were filed but settlements were reached before the shareholder meeting. In 13 of those 25 situations, the activists won at least one board seat.

One activist, VIEX Capital, won two full proxy contests.

The total number of board seats in situations where a definitive proxy was filed (i.e. excluding early settlements) was 30 out of 98 sought.

Activists Counter Board Inertia

Olshan Frome Wolosky Partners Steve Wolosky and Andrew Freedman share their perspectives on the state of shareholder activism, the 2016 Proxy Season and trends to watch out for.

History has shown that entrenched boards of struggling companies, when left to their own devices, display a remarkable deference to the CEOs whom they are tasked to oversee and an inability to hold poorly performing management accountable. Actively engaged investors are the external counterweight to this inertia, compelling boards to focus on the serious issues that are too often casually dismissed.

We keep hearing that public companies are acting and thinking like activist investors. But thinking like an activist requires more than just adopting the low-hanging fruit of governance changes like proxy access and majority voting. It requires honest self-assessment to tackle the tough issues that are likely to be raised by an activist, such as best-in-class performance, board reconstitution and executive compensation. We’ve yet to see any company truly be their own activist in this sense.

Indeed, it would be hard to say that Depomed was thinking like an activist when it sought to further suppress shareholder rights under the guise of a Delaware reincorporation or that Ashford Hospitality Prime was acting like an activist when it disenfranchised shareholders over immaterial nomination technicalities and implemented a massive termination fee “proxy penalty” to entrench itself without any legitimate business reason.

Today’s activist investors are undertaking exhaustive research, presenting incredibly well thought out, detailed white papers and assembling world-class teams of advisors and director candidates. While we are seeing some companies and their advisors co-operate with activists upfront to avoid an escalation, there are far too many still that are digging in and pushing back, or engaging in appearance only.

Over the past decade, our practice alone has had a hand in changing out close to 1,000 public company board members (79 so far in 2016). This much-needed board refreshment is resulting in more-engaged fiduciaries unafraid to ask the tough questions or spark the lively, robust debate that has been absent for far too long in many boardrooms.

Some naysayers like Moody’s claimed activism would decline in 2016, but that hasn’t been the case. The number of campaigns we have advised on has risen more than 20% from our 2015 numbers. While it may not live up to 2014 and 2015 in terms of the big names and huge marketcaps, the 2016 proxy season has certainly been no slouch.

Growth in 2016 was again fueled by first-time activists and ‘reluctavists’, who escalate their involvement with management when all else fails. Harvest Capital Strategies won two of the three seats up for grabs at Green Dot, with only eleventh-hour maneuvering protecting CEO Steve Streit. Other successful activists this year include VIEX Capital—winner of two proxy contests—and Engine Capital, which entered into three settlement agreements. Later in this issue you will read about how the CEO and Chairman of Shutterfly were both out within a year of Marathon Partners’ proxy contest in June 2015.

2016 is also notable as the year when Starboard’s direct involvement at Darden ceased. Since the Starboard-led board takeover in October 2014, the new board has overseen a dramatic operational turnaround, and Darden’s share price is up by around 50%. There is perhaps no better example of an activist success story.

Shareholder activism is succeeding for the most part in creating stronger, more sustainable and focused companies, better governance and, ultimately, increased long-term value for shareholders.

Activism – The year so far

A specter looms over activist investors, as volatile markets, global uncertainty and reduced funding clash with cheap and easy debt, continuing M&A and a secular acceptance of the greater role demanded by shareholders.

Against that backdrop, little has changed outwardly. The number of companies publicly subjected to activist demands rose again in the first half of 2016, climbing 17% worldwide to 473. In the US, growth was slower, from 278 companies in the first half of 2015, to 306 companies year-to-date. In parts of Europe and Asia, the growth was much faster; the UK matching its 2012 peak and Continental Europe surpassing last year’s high. Countries such as Japan and Singapore have seen surges of activity, even while the likes of Hong Kong and South Korea fell back slightly. Activism is here to stay.

“Of all activist demands worldwide in the first half of 2016, 13% related to M&A, compared to 19% in the whole of 2015.”

Mixed signals

That is hardly the full story, however. Primary focus activists—those that dedicate almost all of their portfolio to companies in need of shaking-up—were much less busy in the first half of 2016. Worldwide, those funds subjected 75 companies to public demands in the first half of 2016, against 81 in the first half of last year, a decline of 7%. In the US alone, the same category of funds targeted 20% fewer companies.

And yet, the number of such funds making a demand worldwide grew. In first halves of 2013, 2014 and 2015, active primary focus activists averaged 36. This year they numbered 45. Since there is little evidence that the second half of 2015 was busier than usual, the data is suggestive that the problem is not a lack of activists, but a lack of opportunities.

By contrast, the number of active occasional activists, who launch campaigns less than once a year, has more-than doubled since 2014, to 175. Partial focus activists, which may run campaigns yearly but allocate most of their portfolio to other investments, have remained remarkably steady in recent years. Public demands were made by 58 such funds in the first half of 2016.

Uneventful

Many have predicted a decline in activism as opportunities for a quick return dry up, thanks largely to the slowing pace of M&A activity and opposition to soaring levels of share repurchases. Last month, Starboard Value’s Head of Research, Peter Feld, told a conference that there would continue to be plenty for activists to do in the years ahead, but that it was common for event-driven activism to peak and then fall away.

That prediction is already starting to play out. Of all activist demands worldwide in the first half of 2016, 13% related to M&A, compared to 19% in the whole of 2015 and 15% in the first six months of last year. David Rosewater, Morgan Stanley’s activism defense lead, told the same audience that the “junior varsity” of activists risked calling for companies to sell themselves when there were no obvious buyers. “That’s what you call catching a falling knife,” he added.

Not quite no contest

One arena where some claim activism is dropping off is proxy contests. In the US, 20 contests have gone to a vote this year, compared to 23 in the whole of 2015 and 19 in 2014. Results have been mixed, however. Including another 14 situations where proxies were filed but a settlement was eventually reached or the activist withdrew, activists won 30 board seats (out of 98 sought). In resolved
contests, activists have been left empty handed 15-times.

In the absence of a contest the size of Darden Restaurants or DuPont, many contests have gone relatively unnoticed, with the exceptions of first-time activist Harvest Capital Strategies, which won two seats at Green Dot and narrowly failed to unseat CEO Steve Streit, and Sessa Partners’ bitterly fought attack on Maryland REIT, Ashford Hospitality Prime—a situation that looked hopeless for the activist some weeks ago, but may yet provide a result.

That is not to say activists have forgone large-cap companies. Fully 22% of public activist demands worldwide were at companies with a market-capitalization of more than $10 billion, the highest since 2010. As a share of the total, companies with a market-cap of less than $250 million fell from 43% in 2015, to 37% in the first half of 2016.

Quotes

Commenting on the report, Activist Insight spokesman Josh Black said “Shareholder activism is an increasingly widespread tool for unlocking value. This year we’ve seen traditional activist tools used by ex-CEOs, hostile strategic acquirers and even index funds. Even if the biggest activists have not started as many campaigns in the past six months, there is unlikely to be a shortage of activity in the near-term.”

Andrew Freedman, co-Head of Olshan Frome Wolosky’s Activist & Equity Investment practice, said “Established activists continue to identify opportunities and are better able to push for change behind the scenes. At the same time, previously passive investors have begun to take advantage of some of the items in the activists’ toolkit as a last resort, leading to a big increase in the number of situations over the last six months.”

Dan Burch, Chairman and CEO of MacKenzie Partners, said “In recent years the paradigm has shifted from ‘activism defense’ to ‘activism preparedness’. We have seen companies become much more willing to engage with activists and other shareholders to hear their input on strategy, governance and capital allocation. There are many situations where everyone’s interests are served by settling a contest before it becomes a time-consuming and expensive distraction, but we have also heard some shareholders say they would rather have the ability to vote on the construction of the board than abdicate that process.”

Contributors

In their foreword to Activist Insight Monthly’s Half-Year Review, the co-Heads of Olshan Frome Wolosky’s Activist & Equity Investment practice, Andrew Freedman and Steve Wolosky, comment on the failure of companies to “be their own activists”:

“We keep hearing that public companies are acting and thinking like activist investors. But thinking like an activist requires more than just adopting the low-hanging fruit of governance changes like proxy access and majority voting. It requires honest self-assessment to tackle the tough issues that are likely to be raised by an activist, such as best-in-class performance, board reconstitution and executive compensation. We’ve yet to see any company truly be their own activist in this sense.”

Freedman and Wolosky also give an interview to Activist Insight Monthly in which they discuss areas of growth in activism, regulatory pressure on activists and litigious proxy battles.

Paul Schulman, Dan Burch and David Whissel from proxy solicitation firm MacKenzie Partners also give an interview to the publication, in which they discuss shareholder-director engagement, negotiating settlement agreements and the universal ballot.

About Activist Insight

Since 2012, Activist Insight has provided its diverse range of clients with the most comprehensive information on activist investing worldwide. Regularly quoted in the financial press, Activist Insight is the trusted source for data in this ever-evolving space. Activist Insight offers two great products: Activist Insight Online and Activist Insight Monthly magazine, and counts many of the world’s leading investment banks, law firms, shareholder communications firms and institutional investors as its clients.

About Olshan Frome Wolosky

Olshan Frome Wolosky LLP, a law firm based in New York, represents major businesses and entrepreneurs in their most significant transactions, problems and opportunities. Olshan’s clients range from public companies, hedge, venture capital, private equity and other investment funds to entrepreneurs and private companies worldwide. Clients choose Olshan for innovative strategies and sophisticated, game-changing advice in corporate, securities law, equity investment and shareholder activism, complex commercial, corporate and securities litigation, real estate, intellectual property, bankruptcy and creditors’ rights, and advertising. Since its founding, Olshan has offered an alternative to the AmLaw 50 law firm business model with responsive, independent and client-focused legal counsel provided by the firm’s senior lawyers.

About MacKenzie Partners

MacKenzie Partners is a full-service proxy solicitation, investor relations and corporate governance consulting firm specializing in contested solicitations and M&A-related transactions. We focus on serving our clients in their extraordinary transactions, and have been involved in many of the largest and most significant mergers, tender offers, and proxy contests over nearly three decades. We’re confident that our team approach is the right solution in today’s complex and changing market. Our skill, experience, and dedication to our clients are the reasons that our professionals have become trusted advisors to investors, boards and management teams.

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